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Are Cryptocurrencies Anonymous?

Ten years ago, the question “are cryptocurrencies anonymous?” raged, it still does. Do you have the right answer? Why not read on and find out?

By Abel Mousad

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date_rangeOctober 19, 2019 remove_red_eye 2545

The first people to join the Bitcoin revolution en masse, well, aside from the programmers and enthusiasts, were the drugs and arms peddlers who operated in the underworld markets that are powered by the darknet. The understanding about the only cryptocurrency then, that it was anonymous. And, which criminal does not fancy the idea of transacting anonymously?

However, with the raiding of Agora, and the demise of both Silk Road I and II, and the subsequent capture of ‎Ross William Ulbricht and Blake Benthall, a cloud of doubt descended on the belief of the cryptocurrency’s anonymity. Many people realized then, rather disappointedly, that Bitcoin is not anonymous.

In reality, this belief that Bitcoin is anonymous was and is still misguided. You see, records of every Bitcoin transaction are engraved on a public record that everyone with access to the blockchain can see. That, however, is a story of another episode.

A discussion on the anonymity of the blockchain in general, and cryptocurrencies in particular cannot make much progress without a look at how the blockchain works.

The Blockchain and How it Works

The Blockchain Defined

The blockchain refers to a public ledger or a time-stamped chain of records of transactions that are immutable and is managed by a horde of interconnected computers as opposed to a single entity. Each of the data sets (blocks) is cryptographically bound to another.

The blockchain stands out because it does not have a central authority. The information in the shared, immutable ledger is accessible to anyone. Anything hedged on the blockchain, as such, is transparent.

How it Works

The blockchain, from a layman’s point of view, looks a lot like a spreadsheet that is duplicated numerous times on a network of computers. The architecture of this spreadsheet is such that it automatically updates whenever there is a transaction.

The information on the blockchain is a shared database that reconciles continually. This feature makes the blockchain truly public, easily verifiable, and without a centralized version.

The three characteristics of the blockchain that set out its disruptive nature; decentralization, transparency, and immutability, also play the key role in making cryptocurrency transactions identifiable.

The Blockchain and its Connections to Cryptocurrencies

Having spelled out what the blockchain is all about, how about a definition of cryptocurrencies?

A cryptocurrency is a token embedded on a distributed ledger/blockchain. Also, it is a digital currency created with the cryptographic norms that govern the blockchain. The blockchain, as such, offers the playground upon which the cryptocurrency plies.

The technology creates the environment where users can transact and transfer value. Cryptocurrencies, thus, are the tokens that are used within the network as the means of exchange and transferring the said value.

Aside from serving as a measure of value, cryptocurrencies can also be viewed in the light of administration. On the blockchain, they can serve resource and utility functions. In Proof-of-Work networks, for instance, users can apply their holding in crypto to make decisions on administrative issues of the blockchain. Also, a cryptocurrency within a network may serve the purpose of digitizing the value of an asset.

Having highlighted the connection between blockchain, the technology and cryptocurrencies, the gas that fuel these platforms, it is now reasonable to address the elephant in the room; the anonymity of cryptocurrencies.

Cryptocurrencies and the True Story of Anonymity

Generally, cryptocurrencies are not anonymous. Well, save for a coins that are genuinely anonymous, all other remaining coins, Bitcoin included are pseudonymous at best.

The reason is because with crypto, every transaction is publicly available. Anyone with half a brain and some knowledge of how crypto works can use the transaction records to trace the addresses back to their owners.

However, earlier literature did describe Bitcoin as anonymous. This, probably so because users can send, receive, and transfer value in the form of Bitcoin without providing any personal information.

The common cryptocurrencies without real anonymity are Bitcoin, Litecoin, Ethereum and Ripple.

Bitcoin

Also referred to as an open-source peer-to-peer (P2P) money, Bitcoin is the premier cryptocurrency. It can be sent from one person to another directly over the internet without going through a central bank. It is not anonymous because it is based on a decentralized ledger, every transaction is recorded on the blockchain and is publicly available.

Litecoin

Litecoin is a P2P open-source software and cryptocurrency whose creation and transfer is guided by a cryptographic protocol. This Bitcoin spinoff’s near-zero cost payments happen on a network secured by mathematics. Like Bitcoin, Litecoin’s transactions are publicly available.

Ethereum

Unlike other blockchain networks, Ethereum is a little different in that it is global, open-source platform where users can launch decentralized applications. Here, you can write a code for an application to run exactly like it is programmed, controls digital value, and can be accessed from every corner of the earth.

Ripple

Ripple is a payment protocol that facilitates real-time gross settlement (RTGS) system and doubles up as a currency exchange as well as a remittance network. Its infrastructure is hedged on a distributed open-source protocol that supports tokens representing both fiat and cryptocurrencies.

The ledger runs on a decentralized native coin called XRP. Because of its decentralized nature, Ripple is not anonymous.

How Do You Protect Yourself?

When transacting online while using the pseudonymous coins, it is advisable to practice every available precaution. For instance, using a different cryptocurrency address every time you send or receive money, clouding your IP and internet activity while transacting, and, importantly, using a mixing service whenever you transact in cryptocurrencies.

Also, you may shift to using cryptocurrencies that are anonymous. A few of these are Monero, Dash, Zcash, Verge, PIVX, and Bitcoin Private.

Summary

The conveniences that cryptocurrency transactions offer are immense. However, privacy still remains an issue, especially among the major coins. However, there are safer ways you can apply when transacting, as this narrative highlights.


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